Edited version of private advice

Authorisation Number: 1052282719335

Date of advice: 29 July 2024

Ruling

Subject: Section 23AG income tax exemption - continuous period of foreign service

Question 1

Does your temporary absence from foreign service spent carrying out your work duties in Australia form part of a continuous period of foreign service under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Is your Department of XXXX employment income exempt under section 23AG of the ITAA 1936 for the entire income year ended 30 June 20XX and up to early 20XX in the 30 June 20XX income year?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You are employed in a full-time position.

In early 20XX you were posted to the Country A on a work assignment as a member of a disciplined force, which concludes in early 20XX.

You will return to Australia in early 20XX.

You have no plans to remain in Country A beyond the completion of the work assignment, either on holidays or for additional employment.

The post selection training was performed in Australia in mid-to-late 20XX.

Your start date in your role was in early 20XX, and soon after starting the role you returned to Australia as directed by your employer to complete work duties from early 20XX until early to mid 20XX, where you then returned to Country A.

As such, and as the abovementioned period you spent working in Australia was not classed as being exempt under section 23AG by your employer, your initial 91-day period will not be taken to have commenced until after you had returned to perform your work duties in Country A from early-to-mid 20XX.

Your employer treated your income as being exempt under section 23AG from early-to-mid 20XX on a continuous basis up until early 20XX, as they did not withhold tax from your income payments during this period.

Your scheduled period of foreign service in Country A from early 20XX to early 20XX totals XXX days.

You were directed to return to Australia to carry out work duties for two separate periods as follows:

•         Early 20XX to early-to-mid 20XX (a few weeks in total)

•         Early 20XX to mid 20XX (a couple of months in total).

In early 20XX, you left Country A to perform the above duties in Australia.

Up until this point, with the exception of the period in early 20XX where you also left Country A to perform the same duties, your employer applied the section 23AG exemption to your employment income and ceased withholding tax.

However, your employer has decreed that temporary work-related absences in Australia greater than 14 days are not foreign service, and as such have ceased the section 23AG Tax Exemption for those periods where you returned to Australia to carry out the work duties and have also withheld tax from payments received during this period.

Recreation leave you taken/planned for since being posted in Country A includes:

•         A few days in mid-20XX: Destination Australia

•         A couple of weeks from late 20XX to early 20XX: Destination Australia

•         A few days in early 20XX: Destination Country A

All of the above leave was accrued during the foreign service.

However, your employer has decreed that the leave taken listed below will also not be subject to the section 23AG exemption due to you not having accrued enough recreation leave that can be attributed to Foreign Service under paragraph 23AG(6)(a) of the ITAA 1936. As such, the Department of Defence have also withheld tax from payments received during this period.

•         A few days in mid-20XX: Leave taken in Country A.

•         A couple of days in mid-20XX: Leave taken in Country A

•         A couple of weeks in mid-20XX: Planned leave in Country B.

Directly following the above leave taken in Country A in mid-20XX, your employer advised that you were currently in the process of re-qualifying for the section 23AG tax exemption. As such they continued to withhold tax from your income payments directly following this period of leave.

In addition, directly following the planned leave to be taken in mid-20XX in Country B, your employer also advised that you would need to undertake 91 days of continuous foreign service upon your return to post in mid-20XX, in order to be eligible for a future section 23AG income tax exemption. As such they will continue to withhold tax from your income payments directly following this period of leave, up until the point where you again qualify for the section 23AG exemption.

On top of your normal salary, you have been receiving the following allowances:

•         Overseas Location Allowance

•         Cost of Posting Allowance

•         Child Supplement Allowance.

The salary and allowances are paid fortnightly by your employer.

Whilst these Allowances are paid because of the posting in Country A your employer has been withholding taxes during your deemed 'absence from post'.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23AG

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income includes salary and wages and subsection 6-15(2) provides that if an amount is exempt income, then it is not assessable. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the ITAA 1936 which deals with exempt foreign employment income.

Subsection 23AG(1) of the ITAA 1936 states that any foreign earnings derived by an Australian resident who has been engaged in foreign service for a continuous period of not less than 91 days are exempt from income tax in Australia subject to the qualifying provisions of section 23AG. Foreign service includes being deployed outside of Australia as a member of a disciplined force, for example, the Australian Defence Force.

Subsection 23AG(7) of the ITAA 1936 provides that foreign service means service in a foreign country as the holder of an office or in the capacity of an employee. Australia is not a foreign country for the purposes of the application of section 23AG of the ITAA 1936. Therefore, service undertaken in Australia cannot be regarded as foreign service.

Subsection 23AG(6) of the ITAA 1936 provides that a period during which a person is engaged in foreign service includes any period during which the person is, in accordance with the terms and conditions of that service:

(a) absent on recreation leave, other than:

(i) leave wholly or partly attributable to a period of service or employment other than that foreign service;

(ii) long service leave, furlough, extended leave or leave of a similar kind (however described); or

(iii) leave without pay or on reduced pay; or

(b) absent from work because of accident or illness.

A break between the end of one period of foreign service and the beginning of a later separate period of foreign service cannot form part of a continuous period of foreign service under section 23AG of the ITAA 1936.

However, in some circumstances the 1/6 legislative rule in subsection 23AG(6A) of the ITAA 1936 allows periods of foreign service before and after a break in foreign service to be added together and treated as a continuous period of foreign service.

The Commissioner's view on temporary absences is contained in Taxation Determination TD 2012/8 Income tax: what types of temporary absences from foreign service form part of a continuous period of foreign service under section 23AG of the Income Tax Assessment Act 1936 (TD 2012/8).

Paragraph 1 of TD 2012/8 states that in addition to the reasons listed in subsection 23AG(6) of the ITAA 1936, a temporary absence from foreign service will also include an absence that is both:

•         in accordance with the terms and conditions of that foreign service (that is, the absence is permitted by the employer, whether in an employment contract or under a separate arrangement); and

•         in the course of carrying out either duties or training required by the employer under a continuing foreign service engagement (that is, work related trips directly related to the foreign service) provided the absences are not excessive by comparison with the scheduled period of foreign service.

It is important to note that the inclusion of the concept of a short work related absence as written in paragraph 1 of TD 2012/8 is not an extension of subsection 23AG(6). Rather, the Commissioner considers this to be a pragmatic treatment of short, temporary, one-off events that were not anticipated, regular, routine, or substantial so that the continuous period of foreign service was not broken in order to achieve the policy intent of section 23AG. It is not to be used or relied upon for anticipated, regular or ongoing arrangements.

Paragraphs 71 and 72 of TD 2012/8 provide guidance on work related absences from a foreign country:

If a person engaged in foreign service is required by their employer to spend a short time in Australia or in another foreign country during a period of foreign service for reasons directly related to that person's continuing foreign service engagement, that time will be treated as part of the person's continuous period of foreign service provided it is not excessive by comparison with the scheduled period of foreign service. For example, this will apply to time spent to attend conferences, training sessions or briefing sessions.

What is considered excessive will depend on the circumstances. When determining whether the total days spent outside of the country of foreign service are excessive, all work related absences and available days (see paragraph 73) spent outside of the country of foreign service will be aggregated.

Neither the legislation nor TD 2012/8 specify a particular calculation to determine whether an absence is excessive or not. However:

•         Example 11 in TD 2012/8 indicates that an absence of 14 days in a scheduled period of foreign service of 92 days would not be excessive, while;

•         Example 12 indicates that an absence of one month in a scheduled period of foreign service of 92 days in Australia would be considered excessive.

While TD 2012/8 may appear to suggest that the test for what is an 'excessive' absence is comparative to the length of the scheduled period of foreign service, examples 11 and 12 should not be interpreted to imply that longer periods of foreign service mean that a proportionately longer period of absence would not be excessive.

Further, an absence will not be a temporary absence regardless of the total overall length of service if the focus of your duties for those periods shifts to Australia and you are no longer 'actually on the job' in the foreign country as mentioned in paragraph 46 of TD 2012/8. That is, section 23AG is not directed at exempting from tax in Australia salaries derived from carrying out work duties in Australia.

Application to your situation

In your case, your scheduled period of foreign service in Country A from early 20XX to early 20XX totals XXX days.

You were directed to return to Australia to carry out work duties for two separate periods as follows:

•         Early 20XX to early-to-mid 20XX (a few weeks in total)

•         Early 20XX to mid 20XX (a couple of months in total).

Your total absence from Country A to carry out work duties in Australia totals X days, or approximately 15% compared to your scheduled period of foreign service.

As noted above, an absence being excessive is not considered on a proportional basis. It should be regarded that a person who is engaged in foreign service is doing so because they are unable to carry out their activities in Australia. Work related absences in section 23AG should not be interpreted to mean that a person spending months, or even weeks at a time in Australia is allowable because they are also spending months or years in a foreign country. Further, your 2 return visits to Australia made in a time period of approximately 12 months are considered to have an air of regularity to them so cannot be considered to be 'one off events'.

Accordingly, we consider that the length of time you spent outside Country A and in Australia was excessive.

Further, the reason for your absences was not directly related to your foreign service in Country A.

In Example 11 of TD 2012/8, it provides that a person who returned to Australia to complete pre-deployment training and a person who returned to Australia to plan and arrange things that were needed in the foreign country would be considered a work-related absence. In these circumstances, the absences directly relate to their foreign service engagement because the work and training done in Australia was done in preparation for their work duties in the foreign country.

This is compared to your situation, where you carried out work duties in Australia. You were no longer on the job in Country A - that job being in the foreign country because the work duties you carried out in Australia did not have a sufficient connection to your foreign service in the foreign country, even though your employer directed you to return to Australia.

It is considered that the location in which you carried out your work duties changed temporarily, rather than your absences contributing or being related to your regular duties that were carried out in respect of your foreign service in Country A.

Therefore, your temporary absences from foreign service did not form part of a continuous period of foreign service with the result that in the 20XX-XX income year your foreign service was broken from the time of the first absence in that income year in early 20XX.

As such, the earnings you derived where pay as you go withholding instalments were deducted by your employer during the period from early 20XX to mid-20XX are therefore not exempt from tax under section 23AG of the ITAA 1936.

One-sixth rule

As mentioned above, where an employee takes leave which does not constitute a temporary absence forming part of a period of foreign service, it needs to be determined whether the continuity of service can be maintained under the 1/6th legislative rule.

Subsection 23AG(6A) of the ITAA 1936 outlines the 1/6th legislative rule. This allows two or more periods of foreign service to be added together and treated as a continuous period of foreign service, unless, at any time, the total period of absence (in days) between the periods of foreign service exceeds 1/6th the total number of days of foreign service.

If the period of absence exceeds 1/6th of the total period of foreign service at any time, continuity of foreign service is broken. An employee will then begin a new period of foreign service when he or she next engages in foreign service again and must determine whether that period of foreign service lasts for at least 91 continuous days.

Application to your circumstances

Your start date in your role was in early 20XX in Country A, and soon after starting the role you returned to Australia to complete work duties in early 20XX for a few weeks in total until you then returned to Country A. As such, and as the period you spent working in Australia was not classed as being exempt under section 23AG by your employer, your initial 91-day period will not commence until after you had returned to Country A in early 20XX.

Recreation leave you taken/planned for since being posted in Country A includes:

•         A few days in mid-20XX: Destination Australia

•         A couple of weeks from late 20XX to early 20XX: Destination Australia

•         A few days in early 20XX: Destination Country A.

All of the above leave was accrued during the foreign service.

However, your employer has decreed that the leave taken listed below will also not be subject to the section 23AG exemption due to you not having accrued enough recreation leave that can be attributed to Foreign Service under paragraph 23AG(6)(a) of the ITAA 1936. As such, the Department of Defence have also withheld tax from payments received during this period.

•         A few days in mid-20XX: Leave taken in Country A.

•         A couple of days in mid-20XX: Leave taken in Country A

•         A couple of weeks in mid-20XX: Planned leave in Country B.

In your case, your income was exempt under section 23AG from early 20XX on a continuous basis up until

early 20XX (as your employer did not withhold income tax from your income payments during this period), where you left Country A to perform the duties in Australia until mid 20XX (a total of XX days). As noted above, we have determined that this is not a temporary absence that forms part of a continuous period of foreign service under section 23AG of the ITAA 1936.

However, during this period, you took X days of recreation leave in early 20XX which you advise was accrued during your prior period of foreign service.

As such, when applying the 1/6^th rule to your circumstances, the period of absence in your case is from early 20XX to mid-20XX (XX days), less the X days you took as leave accrued during the prior period of foreign service (XX days), and this will be factored into the calculation of allowable absence without breaking your period of foreign service.

You had completed the following periods of foreign service (and taken periods of leave that had accrued during this previous period of foreign service) before returning to Australia in early 20XX totalling XXX days:

•         Early 20XX to mid-20XX (XXX days)

•         Mid-20XX to Mid-20XX (X days of accrued leave taken)

•         Mid-20XX to late 20XX (XXX days)

•         Late-20XX to early 20XX (XX days of accrued leave taken)

•         Early 20XX to early 20XX (XX days).

As such, when applying the 1/6^th rule to your circumstances, the total number of days of foreign service is XXX days, and this will also be factored into the calculation of allowable absence without breaking your period of foreign service.

Therefore, this calculation is as follows:

XXX/6 = XX days, being the allowable absence without breaking your period of foreign service.

However, as the period of absence in your case is from early 20XX to mid-20XX (XX days), less the X days you took as leave accrued during the prior period of foreign service (XX days), this period of absence exceeds the 1/6 allowable without breaking your continuous period of foreign service.

As such, this XX-day absence constitutes a break in foreign service under the provisions of subsection 23AG(6A) of the ITAA 1936, and from mid 20XX onwards you will again need to satisfy the 91-day requirement in order for your foreign income to be exempt under section 23AG.

Directly following the leave taken in Country A in mid-20XX, your employer advised that you were currently in the process of re-qualifying for the section 23AG tax exemption. As such they continued to withhold tax from your income payments directly following this period of leave.

In addition, directly following the planned leave to be taken in mid-20XX in Country B, your employer also advised that you would need to undertake 91 days of continuous foreign service upon your return to post in mid-20XX, in order to be eligible for a future section 23AG income tax exemption. As such they will continue to withhold tax from your income payments directly following this period of leave, up until the point where you again qualify for the section 23AG exemption.

Given that we have determined that the abovementioned absence constitutes a break in foreign service under the provisions of subsection 23AG(6A) of the ITAA 1936, and from mid-20XX you will again need to satisfy the 91-day requirement in order for your foreign income to be exempt under section 23AG, we agree with the advice you have received from your employer regarding this.